Abstract

This paper investigates how corrupt public officials and private agents adjust to policy reforms that change opportunities for bribery deals to take place. I exploit an exogenously determined tariff liberalization program that altered opportunities to extract bribes through a particular method -"selling" tariff evasion, to study how changes in tariff levels affect the incidence, the distribution, and the level of bribes paid during different stages of the process of importing goods. The reduction in tariff rates was associated with a significant decline (60%) in bribe payments to customs officials for tariff evasion on imported goods. This is however partially offset by the displacement of corruption into other firms of bribe extraction that led to a 70% increase in average bribes per transaction and a shift from collusive to coercive firms
of corruption. I then provide suggestive evidence on how these displacement affects can be economically costly given that firms respond to changes in bribe patterns by adjusting their sourcing decisions. Firms experiencing an increase in the probability of paying a coercive bribe
are more likely to source a higher percentage of their inputs domestically, with significant implications firm performance. These unintended affects of policy reform highlight important policy complementarities in the design of trade and anti-corruption policies.